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With a growing national recession and state legislators and the governor stalled in Sacramento over solutions to California’s looming projected $28 billion two-year budget deficit, Berkeley city officials are predictably warning that the city is in for uncertain economic times.

“The national and regional economic problems that are now regular news stories will impact Berkeley both now and in the years to come,” City Manager Phil Kamlarz and City Budget Manager Tracy Vesely said Monday in a report to the City Council on the First Quarter Budget Update and Economic Impacts on the City’s Budget.

“We have witnessed a turn in the nation’s economy these past 18 months—recently culminating with the failure of the financial sector. The dramatic and rapid decline in the last three months has left us reeling, as we have witnessed a historic financial and banking crisis nationally and internationally—with no certain solution in sight.”

In response, Kamlarz says, “We are not planning for any further cuts for [the 2008–09] budget unless more state cuts are announced,” and his office is already working on contingency plans to freeze new hiring, if needed, to avoid layoffs, and to begin the process of “setting priorities for city services” in the event such services have to be reduced.

There is some relatively good news for the city. Reported projected increases in the cost of the state’s retirement fund—PERS—are not expected to be felt in Berkeley or other cities until 2012.

Meanwhile, projections for this fiscal year’s city general fund revenue are being adjusted downward by $2 million so far, with property transfer tax revenue down 46 percent from this time last year and sales tax revenue down 2.3 percent.

“We were expecting the housing bubble to burst, but not to this extent,” Kamlarz said in a media briefing Monday morning, hours before he presented the same information in a special 5 p.m. City Council budget update session. The city manager added that “the words right now are volatility and uncertainty, as well as caution on our part until we see the first-quarter returns.”

Berkeley’s two largest revenue producers—restaurants and car sales—have been particularly hard hit by the recession, with city officials estimating that business is down as much as 25 to 30 percent. But Kamlarz said that, because tax collections lag behind the actual sales, “we haven’t really seen the effect of that yet.”

Despite the fact that the city’s two largest employers—the university and Bayer Corporation—have not had cutbacks caused by the current recession, Kamlarz said that “Berkeley is not immune to the events that are happening around us. It’s affecting us in ways we never imagined.”

One of those ways, the city manager said, was in recycling. With what Kamlarz called “the collapse of the recyclables market,” the price for turned-in recyclables recently dropped from $200 a ton to $20 a ton.

“What is pretty amazing is how quickly things have been shifting over the past 30 days,” Budget Manager Tracy Vesely told reporters, reflecting how swiftly the national economy has collapsed.

California legislators were meeting in special session this week to figure out ways to close an estimated $11.2 billion gap in the current 2008–09 state budget, a situation left over from the stopgap, patchwork budget that was passed last summer only to give the state the authority to keep programs running and pay its bills and workers. State budget analysts are widely projecting at least another $17 billion shortfall in the 2009–10 state budget, which legislators will take up early next year and which comes due for passage next July.

At the suggestion of city budget officials, the Berkeley City Council set aside a $1.8 million contingency fund in this year’s budget to meet possible funding hits from the state. That contingency has already been eaten up by cuts in the original state 2008–09 budget, including losses to Berkeley of $1.26 million in mental health and public health money, $134,000 for redevelopment, and $317,000 for state mandate reimbursements.

What worries Kamlarz and other city officials is the likelihood that at least some of the projected state shortfall in both the 2008–09 and 2009–10 budgets will be passed on to city governments, in many cases without advance warning.

Cities like Berkeley normally get a monthly remittance fee from the state Department of Motor Vehicles, for example. Last October, however, the city simply got a notice from the DMV indicating a zero balance.

“We all thought that was a mistake,” Budget Manager Veseley said. “But when we contacted the DMV, we found out that the remittance had been wiped out by increases in ‘administrative costs.’ We hadn’t known anything about those increases until we got the notices.”

City officials are expecting to present detailed figures on the actual performance of Berkeley’s first-quarter budget, as well as suggestions for budget cuts if such become necessary, at the City Council meeting scheduled for early February.